Avoid Crunch Time By Preparing Now For Taxes

Preparing for taxes year-round is the best way to avoid a last-minute crunch.

January 30, 2012

Experts recommend looking at taxes as two components: planning and preparation. Tax planning should be done year-round to reap the best possible outcomes and to make tax preparation less stressful.

Veterinarians consumed with patient, staff and daily business responsibilities often put tax planning on the back burner and then miss out on opportunities to find ways to reduce their tax liabilities. Experts say that even if an equipment write-off or other significant deduction is unlikely, advance knowledge of what you will owe in taxes makes for less stress in April.

“Failing to plan or planning at the wrong interval of time is fairly common,” says Mark McGaunn, CPA, PFS, CFP, a managing member at McGaunn & Schwadron CPAs LLC in Needham Heights, Mass. “For practices with static receipts and disbursements, and level inventory and accounts receivable, we recommend that the shareholders or LLC members entertain proactive tax planning in late November or early December at a minimum.

“For clients with fluctuating income,” he continues, “possible capital expenditures of $25,000 or more during the year, we like to see tax plans generated at June 30, September 30 and late November or early December. Filling out the forms is a rote activity that garners little ability to save real tax dollars, but advance warning to veterinary practice owners allows for both cash budgeting and time to implement tax-saving strategies before December 31.”

Some veterinarians think of accounting services as an expense rather than a benefit and take a do-it-yourself approach, which tax professionals say can lead to complications.

“Establishing a relationship with a CPA helps guide practitioners down the tax-planning path year-round,” says Carol Amernick, CPA, president of C.L. Amernick P.C. in Henrico, Va. “Thinking of a CPA relationship as an expense instead of how it can save money in the long run is truly an error.”

Keeping an open dialogue with a CPA year-round means questions and concerns can be addressed early, Amernick points out.

The elective deferral contribution limit for employees who participate in 401(k) plans is increased from $16,500 to $17,000. The catch-up contribution limit for anyone 50 or older remains unchanged at $5,500.

The maximum contribution (employee and employer matching contributions) for defined contribution plans (401(k) and SEP plans) increases in 2012 from $49,000 to $50,000.

Regarding depreciation, the Section 179 first-year expensing amount (subject to income limitations) declines to $139,000 from the $500,000 allowed in 2011.

“The FICA wage base jumps from $106,800 to $110,100 in 2012, so S Corporation employee-owners pegged to the old limit may need to re-evaluate their 2012 compensation to a more reasonable level, if appropriate,” he says.

“We are preparing clients for mid- to late-2012 tax law changes,” he adds. “However, those might not be forthcoming in an election year. But 2013 is bringing some equalizing surtaxes that may affect many high-earning veterinarians. We are holding off on incorporating those into our tax plans at this time.”

“Tax law is a living, breathing thing and is always changing,” she says. “A CPA will not only be aware of the new laws, but help make decisions based on potential tax law changes. CPAs can also translate those laws into meaning something for the practice.”

Software can be used to track business-related data throughout the year, but relying on tax software to file returns, as opposed to using a qualified CPA, can be a mistake.

“Tax software provides a false sense of security,” says Gary Glassman, CPA, principal of Burzenski & Co. in East Haven, Conn. “Software can allow deductions that people are not entitled to. The questions asked by the program can be vague and misleading. For example, the value of a retirement account cannot be deducted in full—the amount invested can, however, be deducted. That can be a big monetary figure.”

A CPA-veterinary relationship can be established at any time, but the consensus is that it should happen sooner rather than later. A CPA involved throughout the tax year can provide guidance on business decisions, but a relationship established in February or March to look at the previous year’s expenses and receipts leaves only preparation to be done.

“We always recommend that veterinarians establish a CPA relationship before ownership is contemplated and to develop the future owner’s financial and strategic mindset,” McGaunn says. “Taxes are just one aspect of the relationship. My partner and I tell clients that the more you know, the more you realize how much you don’t know.

“We could pull our own teeth, sell our house without a Realtor or act as our own attorney, but we know there are professionals who know the subtle nuances of those occupations and we respect our own limitations,” McGaunn adds.

Understand Write-offs

Knowing what can’t be deducted from taxes is as important as knowing what can be. Expenses for entertainment and vehicles are at a high risk for audit, says Ray Bald, CPA, principal at Cummings, Lamont & McNamee, P.A. in Exeter, N.H.

“Entertainment and mileage are two areas the Internal Revenue Service is looking at closely,” Bald says. “You have to keep a mileage log in order to deduct business-related expense. Mileage expenses are supposed to be disallowed if not accompanied by a log. It’s a tedious thing to track, but there are apps that can help keep track of it.”

Similarly, veterinarians need to know which deductions they are allowed to use.

“We ask new clients to be sure to capture all entertainment transactions in their accounting system software by using their operating entity credit card to pay for all purchases rather than paying for seminars, plane tickets, meals and trade show purchases with a personal credit card or check and then having to seek reimbursement,” McGaunn says.

Keep Receipts

Many practitioners have converted to a paperless veterinary practice, which is likely the norm with start-ups. But paper can’t be ignored. Some receipts can be scanned and kept as a digital copy, while others should always be kept in paper form, including those in categories that have a high audit rate.

“Detailed records need to be kept for three years, bank reports and checks need to be kept for seven years and tax returns need to be kept forever,” Glassman says.

Donations and cellphone usage need to be scrutinized as well.

“I tell clients to take pictures of items they donate in the event they are audited,” Amernick says. “Photos help validate the price that was given for the donated item when written off.

Develop processes to keep your financial information organized and up to date. You can’t plan for taxes if you don’t have accurate and timely information. Financial information such as invoices and receipts need to be accessible in the event of an audit.

Include tax planning as part of your overall practice analysis. Income taxes are one of your larger expenses and should be evaluated and managed like salaries and inventory.

Don’t let the “tax tail” wag the dog. It doesn’t make sense to spend a dollar to save 30 cents in taxes. Tax strategies should make economic sense.

Set aside cash for taxes. Don’t assume you’ll find the cash for last-minute tax returns. Falling behind on payments to Uncle Sam is the last thing you want to do.

“Cellphones used for personal and business need to be tracked,” she explains. “The amount of time used for work-related calls must be documented, which might seem arduous but can help reduce the tax payout.”

Delegate Responsibility

Accountants are proponents of handing over the tax paper work to a trusted employee.

“The value of being a veterinarian is much higher than record keeping,” Bald says. “Veterinarians must spend as much of their time as possible generating revenue. Delegating some chores removes tedious tasks from the schedule.”

A concern some veterinarians have with delegating bookkeeping is allowing access to sensitive information, such as payroll, budgets and bills.

“Veterinarians who have concerns about sensitive information can keep that duty for themselves,” Bald says. “But having an employee organize bills into the right expense accounts and code them can eliminate a chunk of work.”

Other Considerations

Being smart about taxes is a big plus for veterinarians during a down economy.

“Veterinarians have been concerned about taxes in both up and down economies,” McGaunn says. “At the end of the day, taxes are just one component of a veterinarian’s outflows. We tell all our practice owners that we wish they had a $1 million tax bill, as they would have a fantastic take-home pay to justify that bill.”

Retirement planning is important not only to a practitioner’s future for also for tax purposes.

“As a CPA and a certified financial planner, we have been asking all of our practices with sufficient cash flow to evaluate if they are able to fund maximum contributions to retirement plans, even in this era of low economic growth, to both save taxes and maintain a pool of dollars outside the practice to fund retirement,” McGaunn says.

For veterinary practice owners, personal and business taxes are closely connected, Glassman says.

“It’s efficient to have both returns completed by the same CPA,” he says. “Retirement plans link business and personal life. I advise veterinarians to take advantage of maximum retirement plans when they exist. You can put away $50,000 or more in tax-sheltered investments.”